Breadth, Momentum, and Asset Allocation Around Retirement
Lazy, low-cost, broadly diversified ETF investors are momentum investors in disguise.
Cap-weighted ETFs (such as VTI or VOO) use a momentum factor. Since they are cap-weighted, the better a stock does, the more you own. The worse it does, the less you own. This is the “self-cleaning function” that The Simple Path to Wealth describes. Momentum is an important return source from cap-weighted ETFs.
Breadth is another concept in investing and has something to do with de-risking the movement of the market and de-risking before retirement.
What is Breadth?
Breadth quantifies total market risk by determining whether most stocks are going up or down. The bull market has legs as more than less stocks are increasing. Once most stocks start turning down, even if the market is at all-time highs, you wonder how much longer teeth will get in the rally.
Breadth is related to momentum. All factors are interrelated; if you combine them, you get average market returns. Since Large Cap Growth has crushed all prior trends for the last 15 years, momentum and breadth are important for investors wanting to own the stock market.
Breadth and Momentum in Disguise
I am a lazy momentum investor in disguise (because I have a factor-based yet largely Cap-Weighted portfolio). Momentum uses breadth as an excuse to bail on buy-and-hold.
I’m not a market-timer, but I am looking for a good time to adjust my asset allocation before retirement. At some point, we must move from an accumulation portfolio to a de-accumulation one.
Like most, I have TINA’d into a more aggressive asset allocation than I’d like. Given the end of the 40-year bull market in bonds, it has been good to be in equities for the last 20 years.
Our parent’s generation had high bond yields and falling prices, and we had TINA. TINA, there is no alternative that requires a more aggressive asset allocation.
The Effect of Recent Market Conditions
Everyone got hurt in 2022, and those who stayed the course saw a good to great 2023. If you are in retirement, are bond yields attractive enough to de-risk your portfolio to prevent sequence of returns risk?
If you sell stocks to buy bonds, when should you do that, considering market prices? Sometimes, you just have to grit your teeth and do it. Other times, you can consider the effect of recent market conditions—breadth even.
Since I’m a momentum investor in disguise, when is it time to get off the momentum train? Is it time to de-risk?
Equal Weight S&P 500
Since I’m a lazy momentum investor, the easiest way to know if a rally has legs (via a crystal ball) is breadth.
Look at the equal weight vs the cap-weighted S&P indexes (RSP vs SPY).
The difference is the outperformance of large-cap growth for the last several years and the last several months. Since we are momentum investors in disguise, we participate in the growth (then they get cut in half) and the growth without worrying about buying or selling.
Using Momentum and Breadth to Find Your Retirement Asset Allocation
When more stocks advance than decline, it suggests bullish market sentiment and confirms a broad market uptrend. Conversely, many declining securities confirm bearish momentum and a downside move in the stock index.
Chartists consider breadth indicators poor timing signals and say you must correlate with the price. Since the price contains all the information you need, always confirm everything with the price. Breadth alone provides false signals, suggesting trend reversals that don’t materialize.
I want to rebalance my retirement portfolio at the optimal time. Since I’m a lazy investor, I might as well consider factors that correlate with and respond well to momentum, like breadth.
I’m not a market timer (or maybe I’m not a very good market timer). Instead, think about trimming at the edges of your portfolio, making changes, or at least giving some consideration to your timing.
You rebalance like clockwork in accumulation (though rebalancing is less useful in retirement), but at some point, you must de-risk. You face both retirement and sequence of returns risk, a toxic ten-year retirement reallocation window. Given the effect of recent market conditions, both momentum and breadth may light the way